A Proposal To Ease the Foreclosure Mess

A former White House economic adviser is calling on senior bank officers to personally vouch for the quality of their mortgage-documentation operations as part of an effort to rehabilitate their stalled foreclosure machinery.

The proposal is modeled after the revamped disclosures that the Sarbanes-Oxley Act required in order to restore credibility to financial statements after the Enron and WorldCom scandals, says Peter Swire, a law professor at Ohio State University who until August served as a top adviser on housing-finance issues in the White House.

Already, Bank of America Corp., has taken a step in that direction. It reached an agreement with Fidelity National Financial Inc., the nation’s largest title insurer, to provide warranties that would indemnify the insurer against claims that resulted from foreclosure errors by the bank. Bank of America on Monday said it planned to resume home foreclosures later this month.

“When there’s a lot of uncertainty and one party knows more than the others, that party is probably the best one to take on the risk,” said Mr. Swire, in an interview. “Banks probably know more than anyone else about what the risks are; they are the best insurers here against this risk.”

Here’s the gist of Mr. Swire’s proposal:

The bank and senior banker would be essentially making a stronger set of “reps and warranties” about the banks’ systems. If a senior officer is not willing to sign, then the regulators and the public have good reason to remain skeptical. If and when the senior officer does sign, the officer and the bank are taking responsibility—something many feel has not happened enough since the financial crisis began.

The certification can also bring increased certainty back to a portion of the housing market—the portion covered by that bank’s activities. More banks will sign over time, and this will create a path forward to leaving this portion of the mortgage mess behind us….

The dilemma for policymakers has been how to choose between inaction and overheated words that could likely harm the housing market. Personal responsibility and certification would allow us to hold banks and bankers accountable while creating a path to renewal for the housing market.

The proposal drew skepticism from some industry officials. “To have yet another round of having to write the Magna Carta every four months, is a lot of theater. There is nothing to be gained by it,” said Richard Dorfman, who heads the securitization group at Sifma and who until earlier this year served as chief executive of the Federal Home Loan Bank of Atlanta.

Mr. Swire’s recommendations can be read in full on the website of the Center for American Progress, a liberal think tank.